Graphic Evidence: When Sino Clean Attacks

Sino Clean Energy Inc. (SCEI) shares jumped 19% on May 9th on news that it filed suit against parties who publicly shorted the company and said it was a fraud.

The company collects coal water slurry fuel, a material that can be substituted for oil or gas in some power generation scenarios.

The suit, like Monday’s announcement of a $20 million stock buyback, was not immediately reflected in regulatory filings with the Securities and Exchange Commission.

The release regarding the suit did not indicate the venue or provide a copy of the complaint, making it difficult to examine the claims or understand why shares rose dramatically on the news.

In yet another contest pitting vocal short sellers against beleaguered Chinese companies, Sino Clean fired a legal blast across the bow of Seeking Alpha and posters who criticized the company.

Defendant Alfred Little maintains a Seeking Alpha Instablog, where he has written posts including “Sino Clean Energy Is a Complete Hoax and its Shares are Worthless.”

A sample:

fraud to date committed against U.S. investors. SCEI management pre-announced its first quarter 2011 results Tuesday in a press release (here) stating that revenues were $33.7 million. In its 2010 10-K (here) SCEI reported 2010 full year revenues of $106.2 million and adjusted net income of $27.9 million. However, four months of surveillance of SCEI’s three coal water slurry fuel (“CWSF”) factories clearly show nothing more than backyard-sized money losing operations.

In another post, Little said that the company’s video footage of actual operations was staged. Rain appearing in the video also indicated it could not have been recorded when the company claimed it was:

Let’s start with easiest video to debunk, the 4/23 14:08 camera 1 video, a still from which is shown above. The ground is all wet. The same soaked scenery is apparent in the 4/23 08:55 camera 1 video that morning. Why was it raining in Ren’s videos? April 23rd was a bright and sunny day in Tongchuan without a drop of rain according to the official record of the Tongchuan City Meteorological Bureau.

It is far from clear whose claims are correct here, especially since Sino Clean has not made its suit available to the public.

(The Rosen Law Firm also filed a class action suit based on claims that the company’s operations are bogus.)

But on thing is clear: volume started rising not long after prices started falling in the last week of April.

The stock closed at $4.52 on April 19, when about 80,000 shares traded. Volume exceeded one million shares on April 26, and one day later the stock closed at $2.81. It sank to a $2.10 close on May 6, when about 5.5 million shares traded.

Monday’s 19% rise came on volume of over 7.5 million shares. The stock had held most of the gain by Wednesday, on volume of nearly two million shares. For the record, the stock’s 3-month average trading volume is around 600,000 shares.

Clearly there is some kind of battle going on in the trading of Sino Clean shares.

While it’s possible that shorters drove the price down, it’s equally possible the announced buy back plan drove prices back up a bit, perhaps enough to roast some short sellers.

But not if they were selling just a few weeks ago at the $4.50 level.

The company announced on May 6 that chairman Baowen Ren had purchased 115,000 shares of company stock with his own money. The release did not provide time and sales, and data from Ren’s Form 4 is not yet available from the SEC.

Analysis posted on TheStreet.com also describes one person’s visit to the company’s facilities that left some doubt about the depth of Sino Clean’s operations.

The piece also considered problems with Gulf Resources and noted that there can be serious problems even if short sellers’ worst-case scenarios are not born out:

The shorts can be 80% to 90% wrong and only 10% to 20% right, but the simple existence of a 10% to 20% problem is very severe.